The American economy is booming at the moment – but booms only last for so long. If history tells us anything, it’s that we’re likely to experience a recession within the next five to seven years. And when this recession comes, financially savvy Americans will have a plan for how they can protect their portfolios with wise investments.
What is a Financial Recession?
If we want to have a discussion about recessions and the smart steps wealthy people take to successfully counteract the negatives that come with them, it’s important that we begin with a clear understanding of exactly what a recession is.
Technically speaking, a recession is a period between a peak and a trough. By contrast, the period between a trough and a peak is known as expansion. The period from late 2007 to early 2009 was a recession. The period from early 2009 to today has been a period of expansion.
During a recession, there’s a significant decline in activity across the entire economy. This period generally lasts anywhere from a few months to a couple of years. (Economists generally wait until there’s two consecutive quarters of declining GDP to use the “R” word.)
6 Investments Built to Withstand a Recession
During a recession, investors aren’t necessarily looking for massive returns. Most will actually settle with breaking even or making some small percentage gains. What you don’t want to do is absorb the brunt of the decline – which is easier said than done.
Every situation is unique, but you’ll find that most successful investors turn to investments like these during down markets:
- Cash
It might not be an investment in the normal sense of the word, but cash can be a smart method of storing money during a recession.
Think of it this way: What’s the difference between someone who has $1,000 sitting in cash making no money and someone who has $1,000 plugged into an investment that loses 20 percent? At the end of the day, the person with the cash is up $200. Sometimes not losing money is valuable place to be.
- Treasury Bonds
High-quality bonds – such as U.S. Treasury Bonds – are great for recessionary periods. They’re slightly more risky than holding money in cash, but they also provide greater returns. During negative economic environments, look for bonds that last around five or six years, as this will get you the best ROI.
- Municipal Bond Funds
While they carry a bit more risk than treasury bonds, municipal bond funds – those issued by state and local governments – are still pretty safe. You may be able to squeak out a couple of percentage points in interest, which is better than nothing.
- Dividend Aristocrats
Dividend stocks are great. The only problem is that many of them decline in value during recessions – leaving you with negative returns, instead of positive cash flow. But there are still some dividend stocks that are valuable.
Your best bet is to go with “dividend aristocrats.” This is the title given to dividends that are in the S&P 500 and have 25+ consecutive years of dividend increases. In other words, they’ve continued to increase dividend payments every year for the last quarter century (even during the 2007-2009 recession). In a stock market where nothing is certain, that’s pretty good!
- Rental Real Estate
It’s always a great idea to purchase real estate when the market bottoms out. The problem is that you don’t know when the market is reaching its low point. So instead of trying to perfectly time the market, you should instead try to invest in the right type of real estate.
A recession is a great time to begin buying apartment complexes. While the number of people buying homes declines in a recession, the number of people renting goes up. This makes it a strong investment opportunity.
- Yourself
Quite honestly, the smartest investment you can make is in yourself. The more money you put into improving your talents, acquiring new skills, and networking with other professionals, the greater your chances are of increasing your income (both now and in the future). Don’t miss this!
Stay Plugged In
We’re at a very interesting point in time. We’ve experienced nearly a decade of unprecedented growth, which was preceded by one of the largest recessions in American history, and storm clouds are brewing. Most experts agree that a recession of some sort is on its way within the next two or three years – though it’s hard to say exactly when.
When it comes to making investment decisions, it’s important that you don’t just hand everything off to someone else. Even if you have the best financial advisors and experts in your corner, it’s wise to stay abreast of what’s happening at all times. You’ll discover that gut instinct and intuition can be as important as technical analysis.